Is three times my salary enough life insurance?

Is three times my salary enough life insurance?

Dear Dave,

My husband and I are 40 years old and have four children age 18 and younger. I’m a stay-at-home mom and my husband works full time. Our current life insurance policy is three times his annual salary, which is around $60,000, and I’m concerned that it’s not enough. Also, do we need a term insurance policy in addition to his insurance from work?

Joyce

Oklahoma City, Okla.

Dear Joyce,

You’re right. You don’t have enough life insurance. With you and those four children depending on what he makes, you need at least ten times his income in insurance. You also need $200,000 – $400,000 on you because if something happens to you, your husband will need to hire someone to do all you do for the family at home. He’s going to get a rude awakening in finding out how much you really do at home. The stay-at-home mom really does bring tremendous economic value to the household that would have to be replaced if something happened to her. We carry $400,000 on my wife Sharon who has been a stay-at-home mom for 17 years.

I suggest ten times his income in insurance because if something happens to him you could take the $600,000 you would receive from his insurance policy and invest it. If you average a reasonable rate of ten percent return, you would receive $60,000 per year in income. Voila! He’s been replaced economically.

I would definitely advise you do a 15-20 year level term insurance policy. This is not the same insurance he gets at work. Usually that insurance is what is called an ART – Annual Renewable Term – and over time it will end up being more expensive than your level term insurance that you purchase outside of work. So I seldom recommend buying the insurance at work unless there are other unusual factors at play. Another reason for not relying solely on the work insurance is, if he has a heart attack and has to quit his job, then he loses his insurance and that health problem makes him uninsurable. Then the two of you have a problem. So I strongly recommend you purchase the bulk of your life insurance, if not all of it, outside of work.

Dave

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What if mutual fund broker went out of business?

Dear Dave,

I’m following your advice to invest in a Roth IRA in the four different mutual fund groups. Is there an inherent risk in just using one mutual fund broker? I’ve got Fidelity mutual funds. Are those securities secured even if that broker were to go out of business?

What about my father’s investments? He’s got individual stocks and different brokerage houses are holding the certificates. Is there a risk if one of those companies were to go out of business?

Steve

Petoskey, Mich.

Dear Steve,

No. There is no risk. They’re 100% safe. The broker has nothing to do with it. He’s just lining you up with a mutual fund company. Fidelity is the largest mutual fund family. They’re huge. Half the brokers in the United States could go broke and it wouldn’t even affect Fidelity.

With your father’s stock certificates, the same thing applies. Those companies do not have ownership of those certificates. They’re just holding them. That having been said, I would advise him to get out of those single stocks because of the risks represented by being in single stocks. Diversifying your investment over many companies, as mutual funds do, is much less risky than putting all of your money in one or two single company stocks.

Dave

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Can you start an ESA for a child who is not born?

Dear Dave,

Is it possible to start an ESA (Education Savings Account) for a child who is not yet born?

Clay

Louisville, Ky.

Dear Clay,

No. They must already have been born because they need to have a social security number for you to open an account in their name. However, you could go ahead and have the social security application filled out – everything except the name and the sex, to make sure that ultrasound was right. Then all you have to do is send that paperwork off and you’ll get the social security number right back. You can have that all done easily within the first year. In the meantime, if anyone wants to give you gifts for the ESA before the account is open, you can just hold that money in your account and deposit it when you open the ESA.

Dave

Disclaimer: Questioner’s identities have not been verified by Dave $ays column or this website.

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